Inflation verses relative price changes
It is starting to look like the cyclical bottom in inflation may be at hand. But there is much confusion over current price changes. There are two types of price changes to consider. One is the change in relative prices. The other is the change in the overall price level, or inflation. Currently we are seeing large change in relative prices, but little change in the overall price level, or inflation.
From their 2008 peak the CRB for foodstuffs fell from 525 to 330 and has since rebounded to 609. So it is now 16% above its 2008 peak.
Over the same period the CRB for industrial raw materials fell from 427 to 286 and rebounded to 464, an 8% gain, while oil fell from $133 to$40 and rebounded back to $90.
But the deflator for personal consumption expenditures is now at 111.6 versus its’ 2008 peak of 110.9. The later is a measure of the overall price level, or inflation, while the swings in commodity prices measure changes in relative prices, not inflation.
Part of the reason that inflation and swings in raw material prices are two very different things is that raw material prices are such a small portion of final costs and big changes in raw material cost have little impact on final prices.
Over the past year semiconductor prices fell about 15% while cotton prices rose 115%. These are changes in relative prices, not inflation. The Fed is no more responsible for the rise in cotton prices than it is responsible for the fall in semiconductor prices. In 2010, nominal GDP rose 4.2% and the GDP deflator was up about 1%. Over the same time, M 1 rose 6.5% and MZM was up about 2%. This is what you can hold the Fed responsible for, not the change in relative commodity prices.
Moreover, labor compensation only rose about 1.5% and unit labor cost for nonfarm business is still falling. As long as these factors are this weak, I will not worry too much about inflation.
I do love :market fundamentalists” compalining about rising commdoity prices as a sign of inflation. Its almost like they don’t understand how the price system actaully works and are ,aking decisions entirely based upon sloganeering! It woudl be like a bunch of managers complaining they can’t hire workers at below market wages!
I would not be worried about inflation either. I’m more concerned about managers not needing to hire anyone at below market wages because no one can afford to buy their ware…including food.
I’m with DoLB.
CoRev–Let me take this rare opportunity to agree with Spencer, rob, DOLB, and you. 😀 NancyO
Kum ba ya!
Nice post.
Spencer:
Gonna disagree with you on this:
“Over the past year semiconductor prices fell about 15%”
Can you explain this a tad, we are not seeing across such manufacturers as Infineon, ST, Renasas, NXP, OnSemi, Epcos, etc. We just got out of negotiations and much of what we negotiated did not include any price roll backs. In terms of capacity utilization, the industry is at 95% which certainly would not support a proce roll back. Our lead times are still out to 26 weeks.
http://www.semiconductorintelligence.com/?p=199
http://www.semiconductorintelligence.com/?p=145
Spencer:
Gonna disagree with you on this:
“Over the past year semiconductor prices fell about 15%”
Can you explain this a tad, we are not seeing such with manufacturers as Infineon, ST, Renasas, NXP, OnSemi, Epcos, etc. We just got out of negotiations and much of what we negotiated did not include any price roll backs. In terms of capacity utilization, the industry is at 95% which certainly would not support a proce roll back. Our lead times are still out to 26 weeks.
http://www.semiconductorintelligence.com/?p=199
http://www.semiconductorintelligence.com/?p=145
the reason so many people are confused and think that inflation is too high is that they’re spending too great a percentage of their income on food, gasoline and heating…to avoid inflation, they should be spending much more on entertainment, furniture, appliances, electronics and new cars, and borrowing more to do it…
Heat: oil for heat is back to $3.70/gal. which is ruinous for many….but Obama also then austeritizes gov. help to those needing assistance to heat their homes…
What is a substitute when hamburg is too expensive and needs substitution?
“It is starting to look like the cyclical bottom in inflation may be at hand.”
Synchronicity! Oddly I came to the same conclusion yesterday. I was looking at yoy trimmed mean PCE and median CPI to see if I could spot anything interesting. yoy TMPCE was at about 0.8% the last three months of 2010 and yoy MCPI has bounced around 0.5% or 0.6% since last April. It sort of looks like the great disinflation has at last ended.
What would reinforce this opinion? Look at yoy ULC. It bottomed out at -3.5% in 2009Q4 but has bounced back to -0.2% as of last quarter.
the 15% drop in semi prices is what the PPI shows.
That is not an unusual drop in semi prices, it is more unusual to see prices rise.
The Fed’s capacity tiliztion shows the same weakness in semi cap use as your source.
Generally falling cap use signals a switch from a sellers to a buyers market even when it is high.
Thanks Spencer:
I hope you are right. The market place has been brutal and we have been promised more capacity and chips for a year now. Its always tomorrow!!!! and it never comes. 🙂
turnips
With housing still falling, forecolsures increasing, a substantial number of homewoners underwater, unemployment/underemployment/nonparticipation at depression levels, wages flat, debt deflation still a distinct possibillity, and no upturn in CPI, we are talking about inflation because of some relative price increases? This is Zero Hedge stuff.
run 75441– I’ve always looked at semis as industrial production on steroids.
Since semi are an intermediate good demand is essentially a function of
industrial production. Look at a chart of semi output and total industrial
production growth. If you do not have the data you can download it from the fed.
They move in lock step.
I just picked semis to have an example of falling prices to contrast with cotton.
Now that I think about it, it probably would have been better to use computers.
fried spam and ketchup…
Hackett Fisher’s book, The Great Wave, has a big discussion about European price cycles since the late Middle Ages. Generally, there have been periods of price stability and periods of rising prices and societal stress or collapse. During those periods of inflation there is usually a divergence in the price of raw materials and labor intensive products with the former rising while the latter fall. Needless to say, this is not good for those who sell their labor, so inequality increases.
We seem to be in such a period now, with manufactured goods getting cheaper, and services likely to follow, even as commodities get more costly. I should probably grind some data and see if I can make some sense of the situation in light of the historical cycles.